Publication: A simple explanation of the relative performance evaluation puzzle
dc.affiliation.dpto | UC3M. Departamento de Economía | es |
dc.contributor.author | Celentani, Marco | |
dc.contributor.author | Loveira, Rosa | |
dc.date.accessioned | 2012-10-03T15:32:54Z | |
dc.date.available | 2012-10-03T15:32:54Z | |
dc.date.issued | 2006-07 | |
dc.description.abstract | We study a simple moral hazard model in which two risk-neutral owners establish incentives for their risk-averse managers to exert effort. Because the probability distributions over output realizations depend on a common aggregate shock, optimal contracts make the compensation of each manager contingent on own performance but also on a performance benchmark—the performance of the other firm. If the marginal return of effort depends on the aggregate state, optimal contracts are not monotonically decreasing in the performance benchmark. This provides a simple explanation of the Relative Performance Evaluation (RPE) Puzzle—the documented lack of a negative relationship between CEO compensation and comparative performance measures, such as industry or market performance. Our simple model can also explain one-sided RPE—the documented tendency to insulate a CEO's rewards from bad luck, but not from good luck. We clarify that our results are robust in several dimensions and we discuss other applications of our findings. | |
dc.description.sponsorship | Marco Celentani acknowledges the financial support of Fundación BBVA. Marco Celentani and Rosa Loveira acknowledge the financial support of project BEC2002-03715 of Ministerio de Ciencia y Tecnología and of project SEJ2005-08462 of Ministerio de Educación y Ciencia | |
dc.description.status | Publicado | |
dc.format.mimetype | text/plain | |
dc.format.mimetype | application/pdf | |
dc.identifier.bibliographicCitation | Review of Economic Dynamics, july 2006, vol. 9, n. 3, p. 525-540 | |
dc.identifier.doi | 10.1016/j.red.2006.04.001 | |
dc.identifier.issn | 1094-2025 | |
dc.identifier.publicationfirstpage | 525 | |
dc.identifier.publicationissue | 3 | |
dc.identifier.publicationlastpage | 540 | |
dc.identifier.publicationtitle | Review of Economic Dynamics | |
dc.identifier.publicationvolume | 9 | |
dc.identifier.uri | http://hdl.handle.net/10016/4824 | |
dc.language.iso | eng | |
dc.publisher | Elsevier | |
dc.relation.publisherversion | http://dx.doi.org/10.1016/j.red.2006.04.001 | |
dc.rights | © Elsevier | |
dc.rights.accessRights | open access | |
dc.subject.eciencia | Economía | |
dc.subject.jel | C72 | |
dc.subject.jel | D82 | |
dc.subject.jel | M52 | |
dc.subject.other | Relative performance evaluation | |
dc.subject.other | Optimal contracts | |
dc.subject.other | Executive compensation | |
dc.title | A simple explanation of the relative performance evaluation puzzle | |
dc.type | research article | * |
dc.type.hasVersion | AM | * |
dc.type.review | PeerReviewed | |
dspace.entity.type | Publication |
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